Guest Speaker: Mapping the Entrepreneurial Psyche

If this magazine decided to choose a patron saint, I'd nominate the economist Joseph A. Schumpeter. Born near Prague in 1883, Schumpeter (pronounced SHOOM-pay-ter) was one of the most astute business thinkers who ever lived, and--luckily for me as his biographer--an electrifying personality besides. He liked to say that he aspired to be the greatest economist, lover, and horseman in the world. Then he'd pause for a second before delivering his punch line: Things weren't going well with the horses.

I'll leave it to other historians to assess his way with women. But when it comes to economic matters, Schumpeter's self-regard seems close to the mark. In his classic book of 1911, The Theory of Economic Development, Schumpeter broke with traditional thinking about business, enthroning the entrepreneur as the source of all economic progress. The book made him famous in academic circles at age 28, although his ideas didn't fully catch on until recently, when the vital importance of entrepreneurship became obvious to everybody.

One of the hallmarks of Schumpeter's 1911 book is that he ventured into territory where no economist had gone before--namely, the psychology of entrepreneurs. Entrepreneurs, he insisted, are not propelled solely by a wish to grow rich or by any "motivation of the hedonist kind." Instead, they feel "the will to conquer: the impulse to fight, to prove oneself superior to others, to succeed for the sake, not of the fruits of success, but of success itself…There is the joy of creating, of getting things done, or simply of exercising one's energy and ingenuity."

Celebrating entrepreneurship was a radical idea in 1911, a time of turbulent economic change that nobody seemed to understand. In Europe, socialism was rapidly on the rise. In the United States, business success was often viewed warily, with muckraking journalists accusing robber barons of taking over the economy. Schumpeter's insistence that entrepreneurial capitalism was the only system that could create a better life for the masses went directly against the prevailing tide. The argument was all the more remarkable coming from a young professor working at a school in the middle of nowhere--the University of Czernowitz, then part of the Austro-Hungarian Empire and now part of Ukraine.

Schumpeter was not just an academic, however, which may explain his unusual views. He interrupted his teaching career on three occasions. For a year he practiced law in Egypt, where he made a small fortune managing a wealthy family's investments. In 1919, he served for seven months as the first finance minister of the Republic of Austria. Next he became president of a small investment bank in Vienna. In that job he traded and invested for his own account and amassed another fortune, which he lost almost overnight in the Vienna stock market crash of 1924. He then returned to teaching, and forever after held the view that failure was a phase through which nearly all people must pass on the way to success. The ability to take a punch, and then get up off the canvas to win the fight was, he thought, one of the defining characteristics of entrepreneurs.

Ultimately, Harvard came calling, making an offer Schumpeter couldn't refuse. Notwithstanding his international reputation, he was flat broke. He had to make paid speeches to raise the money for his transatlantic steamship ticket. It took him 11 years to pay his debts from 1924.

Schumpeter was not the only person to struggle during those years, of course. During the long period of the Great Depression, many people were disillusioned about the apparent failures of capitalism, especially in light of the seeming economic vitality of communist and fascist regimes. Schumpeter feared that people did not understand what was really happening. He acknowledged that wealth and income would always be distributed unevenly. But he also argued that individuals would rise and fall according to their entrepreneurial talents. New entrepreneurs, new products, new services and business strategies would replace older ones, and progress would result.

But people seemed much more convinced by Schumpeter's main rival, John Maynard Keynes. In 1936, Keynes published The General Theory of Employment, Interest, and Money, a book that charted a way out of the Depression, principally through deficit spending by governments to stimulate both investment and consumption. For the rest of their lives, Keynes would overshadow Schumpeter.

Keynes, who was also born in 1883, was a brilliant writer, a great intellectual salesman, and an original thinker. He identified many important new concepts: the multiplier effect, the division of national income between consumption and investment, and a series of analytical measures that added up to a new way of thinking that the world came to call "macroeconomics." Keynes's was an aggretative, top-down way to analyze national economies as whole entities. Indeed, Keynes's book, 403 pages long, does not contain the name of a single firm or individual businessperson. Schumpeter's book Business Cycles, published in 1939, mentions dozens.

Until his death in 1946, Keynes never strayed from his central message, mostly ignoring contrary evidence. His approach was easily mathematized, and therefore very appealing to academic economists. And his explanation of the causes of and cures for the Depression certainly seemed plausible. For those reasons, the "Keynesian Revolution" came to dominate economics.

Undaunted, Schumpeter pushed his analysis of entrepreneurship even further. He believed that Keynesian thinking overemphasized the role of the government, and that people had forgotten about the entrepreneurial energy that had made the U.S. the richest country on earth. In 1942, he coined the phrase "creative destruction" to describe the incessant changes typical of capitalist economies. This observation--that the same innovation that creates an opportunity for one business destroys another--became his signature insight.

Though he respected big businesses, Schumpeter preferred start-ups and cited many examples of how fledgling ventures were able to take advantage of creative destruction. The factory wiped out the blacksmith shop just as the car made the horse and buggy obsolete. Schumpeter insisted that "a perennial gale" of creative destruction was the essence of capitalism. An outsider himself, he believed that outsiders in general were better positioned to imagine big changes and new opportunities. Because of the tremendous obstacles entrepreneurs must overcome, however, Schumpeter held that successful innovation is "a feat not of intellect but of will."

Schumpeter died in 1950, a legend in academic circles but by no means a household name. Then, in the 1980s, his ideas experienced a renaissance. The stagflation crisis of 1973--which could not be explained using Keynesian methods--had prompted a widespread reevaluation of Keynesian thought. Meanwhile, innovations ranging from the personal computer to the Toyota (NYSE:TM) Production System were revolutionizing entire industries. Business thinking began to focus on innovation, entrepreneurship, strategy--and what was happening inside actual companies. The more people rediscovered Schumpeter, the more they understood the sea in which they were swimming. In an era of unprecedented innovation, his work is seen as more prescient than ever. In academic and nonacademic writings, references to Schumpeter now outnumber those to Keynes, a situation that would have been unthinkable only a few years ago.

Today, for the first time in history, a majority of the world's people are living in countries with capitalist economies. Partly because of this fact, the business environment is changing at a faster pace than at any other time in history. The process of globalization and the development of the Internet have transformed the world, creating new opportunities for entrepreneurs everywhere.

The choice today is whether a businessperson will be on the giving or the receiving end of creative destruction. As Schumpeter put it, a roster of leading entrepreneurs would be like a hotel: "always full of people, but people who are forever changing."

Throughout his life, Schumpeter demonstrated an understanding that change was something to be embraced as an inevitable part of life in market economies, not something to be avoided. He reinvented himself many times, as lawyer, professor, high government official, investor, and professor again. Will you be the creator and developer of a new opportunity or one whose business is overtaken and destroyed by someone else, outworking you either at home or abroad? That's up to you, not Schumpeter. He didn't write explicit how-to books. But his basic lessons run deep--very deep--and they're worth learning and thinking about.

Thomas K. McCraw, a Pulitzer Prize-winning historian, taught for many years at Harvard Business School. He recently published Prophet of Innovation: Joseph Schumpeter and Creative Destruction.